Who Caused the Economic Crisis?

[tongodeon]

The economic collapse is on everyone's mind and a major factor in the presidential election, and there are a lot of mistakes and distortions flying around especially with regard to how Fannie Mae and Freddie Mac were involved in the problems. The planetmoneymp3 podcast covered a lot of this ground this week. Here's my summary.

1. If the collapse is the fault of Republican pressure to deregulate the financial markets I have seen no actual evidence of this Republican deregulation. The mortgage and credit crisis was caused in part by the Gramm-Leach-Biley Act in 1999 which repealed large parts of the 1933 Glass-Steagal Act, but the act passed with broad bipartisan support. For presidential race followers keeping score McCain's economic advisor Phil Gramm did introduce the bill but McCain did not vote while Biden voted in favor and Bill Clinton signed it into law. Everyone is at fault here.
2. The collapse is not the sole fault of the Democrats' pressure to encourage low income applicants, particularly minorities, to apply for loans they couldn't afford. McCain says "I was the one who called at the time for tighter restrictions on Fannie Mae and Freddie Mac that could have helped prevent this crisis from happening in the first place. Senator Obama was silent on the regulation of Fannie Mae and Freddie Mac, and his Democratic allies in Congress opposed every effort to rein them in." It's true that in January 2005 Republican Charles Hagel tried to pass the Federal Housing Enterprise Regulatory Reform Act to stop this irresponsible lending. But Democrats didn't kill the bill - it made it out of the House Banking Committee despite Democrat Barney Frank's opposition and was never brought up for vote by the Republican majority who controlled the senate agenda. And it's true that John McCain was one of three cosponsors, but he added his name on May 25, 2006 after the bubble had peaked and was starting to burst. If the law had passed it would have only limited the number of loans that Fannie and Freddie could have bought or held at the discretion of the Chairman of the Oversight Board of the Federal Housing Finance Agency, Bush appointee James Lockhart, who has been doing the opposite over the last year - helping Fannie and Freddie buy more riskier loans because the Republicans thought it would help the economy. So it's unlikely that the FHERRA would have actually acomplished anything even if it had not been defeated by the Democratic opposition that did not defeat it.
3. The collapse is not the fault of Fannie Mae and Freddie Mac. In the second debate John McCain said "Really, the match that lit this fire was Fannie Mae and Freddie Mac. ... they’re the ones that, with the encouragement of Senator Obama and his cronies and his friends in Washington, that went out and made all these risky loans, gave them to people that could never afford to pay back." The subprime crisis did not start with Fannie Mae and Freddie Mac. Wall street, bankers, and other lenders popularized the subprime mortgages that Fannie Mae and Freddie Mac did not get involved in until relatively late in the game as they started losing market share. They ended up competing with Wall Street and banks for riskier and riskier loans. They contributed to the problem but did not cause the problem and were not even the single greatest input.

So who *is* at fault? Pretty much everyone to one extent or another. The Fed for keeping the prime rate cheap and saying "recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages", greedy real estate agents, home buyers, and mortgage brokers, anyone who touched Gramm-Leach-Bliley (including Clinton), George Bush's overarching antipathy toward regulation, and an obscure accounting rule called "mark to market". In short: the parties suck more or less within a system that sucks and we need to change the way it all works.

For more information check out who caused the economic crisis and the the fine news sources mentioned here.